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Monetary Policy Consistent with Sustainable Growth

The Reserve Bank Board noted that conditions in established housing markets had continued to vary considerably. There had been clearer signs of an easing in conditions in the Sydney market but less so in Melbourne, where prices had continued to grow strongly. Borrowing for housing had continued to outpace growth in incomes, although the composition had shifted towards owner-occupiers, with higher interest rates for investors in housing reflecting the ongoing effects of APRA’s recent measures to strengthen lending standards in this area.

Taking into account all of the available information, and the need to balance the risks associated with high household debt in a low-inflation environment, the Board judged that holding the stance of monetary policy unchanged would be consistent with sustainable growth in the economy and achieving the inflation target over time.

There is no better time to take stock of your financial position and structure your current debt to take advantage of the low-interest-rate environment.

 

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

How are you placed should interest rates rise?

Can you remember back to November 2010?

It was the last time the Reserve Bank of Australia raised the cash rate, to 4.75 per cent.

A lot has happened since then, including plenty of interest rate cuts: the cash rate now stands at 1.5 per cent – a historical low.

We are now at a point in time where the economy is improving and the official cash rate is tipped to rise sometime in 2018, which will put an end to the easing cycle.

The banks are facing increased regulatory pressure from the Australian Prudential Regulation Authority (APRA). Australian banks face some of the toughest guidelines in the financial world.

How are you placed should interest rates rise? It’s time to act now and position your financial circumstances to cushion the effects should interest rates increase.

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Owner Occupier versus Investor

In Australia, growth in housing credit has remained steady during 2017; slower growth in lending to investors has been offset by stronger growth in lending to owner-occupiers. While growth in housing lending by the major banks has slowed over 2017, growth in housing lending by smaller lenders has increased.

This partly reflected the response of the major banks to the measures introduced by the Australian Prudential Regulation Authority (APRA) earlier in the year in relation to interest-only lending, which makes up a larger share of lending by major banks than by other lenders. Loan approvals for new dwellings had continued to increase over 2017.

Average lending rates were estimated to have increased slightly over 2017, reflecting higher interest rates for investors and borrowers with interest-only loans. The average interest rate on new variable-rate loans is estimated to be around 30 basis points below that of investment loans.

When did you last review your financial circumstances and ensure you are taking advantage of the best lending structure and interest rates?

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

The Reserve Bank Update

The Reserve Bank of Australia left the cash rate unchanged at a record low of 1.5 percent during the meeting held on September 5th, as widely expected. Policymakers said the Australian economy is expected to pick up gradually over the coming year, supported by improving outlook of non-mining investment, while inflation is estimated to rise as the economy strengthens.

Employment growth has been stronger over recent months and has increased in all states.

Wage growth remains low. This is likely to continue for a while yet, although stronger conditions in the labour market should see some lift in wages growth over time.

The low level of interest rates is continuing to support the Australian economy. Taking account of the available information, the Reserve Bank Board judged that holding the stance of monetary policy unchanged at the last meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Are your financial circumstances positioned to take advantage of current sound economic conditions?

Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Interest Only: PI Rate Movements

The average interest only investment loans with a variable rate have shot up by 73 basis points due to rate movements beginning last November.

These figures, from the latest Reserve Bank of Australia (RBA) Statement on Monetary Policy released on 3 August 2017, reveal this increase was caused by a double whammy of rate rises in November and again in June.

“Since May, most lenders have increased their standard variable reference rates for interest-only loans by around 30 basis points and reduced standard variable rates for principal-and-interest loans to owner-occupiers by around five basis points,” the RBA wrote.

The average fixed and variable rates, as well as the associated changes since November, are listed below:

Interest rate Change since Nov 2016
Variable P&I rate
Owner occupier 4.41% -4 basis points
Investor 4.98% +29 basis points
Variable IO rate
Owner occupier 4.98% +52 basis points
Investor 5.46% +73 basis points
Fixed P&I rate
Owner occupier 4.14% +3 basis points
Investor 4.45% +20 basis points
Average outstanding rate 4.63% +13 basis points

 

– Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Interest Rates – Will they rise, remain stable or fall?

If you have been listening to the so-called experts most were predicting interest rates to fall. Then most predicted they would rise. All the while they have remained steady and are now most likely to stay that way for the rest of this calendar year, and well into the new year.

Whilst the official cash rate has not changed since September 2016 the banks have independently responded by raising rates, particularly on interest only loans, which mostly are used by investors. Investors are now paying much more than a year ago.

In addition, the new bank levy imposed by the Federal Government on the big four in the recent budget is also likely to be passed on and, in fact, smaller and regional banks have already shifted rates higher in anticipation.

Given Bank interest rates already are on the up, and wages growth is the weakest on record, it would be a brave RBA governor who would contemplate a rise in the near future. Phil Lowe will let the banks do the work for him.

Regardless of when your existing loans are due for review, NOW is the time to consider your financing options.

With so many changes to lending criteria in the past few months, nobody quite knows where this will end. One thing is certain, however, that investors need advice right now to ensure they are correctly structured.

Many investors who are coming off their 5-year interest only agreement with their Bank, are going to get a rude shock when their Bank denies a further interest only extension of that loan. A possible solution is to apply for an extension today, whilst they are still eligible.

– Carl Thompson – Commercial Lending Specialist, Strategic Investor Group

Right now, is the time to review your debt – it’s costing you money

 

Although the official cash rate remains on hold, all four major banks in June raised interest rates by between 0.3 and 0.35 percentage points on interest-only home loans, mainly used by investors, while also cutting some other owner-occupied rates by a much smaller amount.

One reason is the prospect of tougher capital rules.

Any week now, the Australian Prudential Regulation Authority (APRA) will reveal how much extra capital banks must hold to be more shock-proof, a change that on its own would dampen profits.

Recent behaviour sees the banks having a track record in passing on the cost of tougher capital requirements to their customers.

A recent Reserve Bank paper pointed out that since 2008, official interest rates set by the RBA had dropped 5.75 percentage points, but the rates banks charge on home loans were only down by around 3.9 percentage points over the same period.

It is highly likely that the next round of capital rules may also see another out of cycle rate increase for investor loans.

A second and related reason why investors and people with interest-only loans may keep copping it is the regulators’ concern about the housing market.

In March, APRA imposed a 30 per cent cap on the proportion of new mortgage lending that can be interest-only, alongside a previous 10 per cent cap on growth in the stock of housing investor loans.

Banks have adjusted to these caps through a combination of tougher lending rules, and price signals.

However, the objective of these two caps is also to limit competition in housing investor lending.

The recent rate hikes by banks should quell some of the RBA’s fears about households’ excessive interest-only borrowing, without any need to move the cash rate.

A third reason why property investors may face higher interest rates is the political target on the banks’ backs. When they are so on the nose with pollies, bankers are naturally hesitant about slugging the majority of mortgage customers, who are owner occupiers, with higher rates.

But when housing affordability is so stretched in NSW and Victoria, it’s a brave politician who comes out and bashes the banks for jacking up rates on landlords.

Whether it is tougher capital rules, curbs on the housing market, or the bank tax, lenders have plenty of excuses to raise interest rates at their disposal. Property investors have become the easiest group for the lenders to target.

With so many changes to lending criteria in the past few months, nobody quite knows where this will end. One thing is certain, however, that investors need advice right now to ensure they are correctly structured.

Many investors who are coming off their 5-year interest only agreement with their Bank, are going to get a rude shock when their Bank denies a further interest only extension of that loan. A possible solution is to apply for an extension today, whilst they are still eligible.

– Carl Thompson – Commercial Lending Specialist, Strategic Investor Group